Apr

18

The gaming of the market by power utilities is described in more academic terms in Hirschhausen und Zachmann in this paper.

Cf. Figure 1, strategy of withholding.

The problem is that it is very difficult to detect and prove that a utility is gaming the market. If one wants to find technical reasons to shut down a plant, they will always find technical reasons. This is just an example and there are other ways utilities can game the market. […]

Rocky Humbert comments:

The paper states that RWE, EON, EnBW and Vattenfall account for 85% of total production, and allege that these producers are engaging in practices that represent a "problem." Oddly, the authors fail to calculate (or even cite) the classic HHI "Herfindahl Index," which is the standard methodology by which US regulators apply anti-trust law to industries and mergers.

I submit that the "money quote" in this paper is:

Thus, even though demand has risen, generators have reduced capacity by 4.2 GW (1.3 GW of new construction 7vs. 5.5 GW of plant closures). 3.7 GW of the retired power plants had low generation costs. The European Commission also suggests extensive inefficiency of the existing capacity: mid-load power plants have relatively low load factors (30-40%) while several more expensive power plants show load factors of 70-90%.

It doesn't take a lot of brain power to see that rising demand and falling supply means higher prices. That's not collusion. That's good old-fashioned supply and demand. They also suggest that generators are intentionally shuttering "low-cost" capacity for the sole purpose of raising prices. That belief defies rational logic. Something else must explain that behavior. Admittedly, I don't know anything about electricity generation in Germany. So I'll ask the following simple questions:

1) E.ON's ROE from 1992 to the present has averaged about 12% — with unremarkable profitability. So if they are extracting monopoly profits, they're not very good at the game.In contrast, RWE's ROE from 1993 to 2003, averaged about 15%. But from 2004 to 2010, it averaged about 20%. So, something seems to have structurally changed for them in 2004. What was it? And why isn't E.On playing that game?

2) If there are excess profits to be made, what keeps out new entrants from eventually entering the generation market? This is especially true since the authors acknowledge the availability of long-term supply contracts from producers.

3) Price-spikes are annoying, and power-outages are troubling (especially when you're in the elevator), but the authors don't suggest that the grid has become less reliable. They just say that the price has gone up. And rising prices (absent obscene profitability) could easily be attributed to other regulatory effects. It could also be attributed to better grid reliability…

Just some food for thought from someone who is naturally dubious of blaming the evil speculators and profiteers…